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Bradley Vallerius

Bradley  Vallerius
Bradley has been researching and writing about the business and law of internet gaming since 2003. His work has covered all aspects of the industry, including technology, finance, advertising, taxation, poker, betting exchanges, and laws and regulations around the world. Bradley can be reached through his website

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U.S. Online Gambling Prohibition Likely Not Enforceable

5 Oct 2006

By Bradley Vallerius
Rushed through Congress in the final hours of the 2005-2006 legislative session, the Unlawful Internet Gambling Enforcement Act seems likely to fail in its ultimate goal of prohibiting Americans from depositing and withdrawing money from offshore-based online gambling companies.

To be truly effective, the regulations should mandate that America's financial networks identify every product and service that an American purchases and to whom payment is made. If the purchase is related to online gambling then financial institutions should be required to deny it.

The Act's effectiveness will rely heavily upon how well the Fed and Treasury are able to deal with "uncoded" transactions. While credit card transactions always contain a code that identifies what type of product or service is being paid for, paper checks, electronic checks and Automate Clearing House (ACH) transactions do not have such a code that would allow financial institutions to monitor and block them.

As late as July the banking industry opposed an earlier form of the legislation due to what the Independent Community Bankers of America (ICBA) called "an impossible compliance burden for 'uncoded' transactions."

By the time the bill was attached to the port security bill on September 30 it had been altered with concessions that could seriously jeopardize its effectiveness.

"We were fortunate to be able to work with the bill's sponsors to minimize the burden that it could have imposed on banks," said Laura Fisher, the American Banking Association's (ABA) head of public relations on issues relating to banking legislation and regulations. "There's a provision in the bill that says the Treasury and the Federal Reserve can exempt certain transactions that they deem impossible to track and code.

"The two specific transactions are checks and Automated Clearing House payments."

The Federal Reserve and Treasury will be tasked with devising the regulations that will enforce the Act after it is signed into law. The process will involve an issued statement regarding how the Fed and Treasury propose to enforce the law, followed by a public comment period during which interested parties may submit thoughts and concerns about the matter.

The ICBA and ABA are certain to argue for exemptions for ACH payments as well as paper and electronic checks.

"There are 40 billion checks processed every year, and tracking those would mean having a staffer manually review each check and review whether each payee is an illegal gambling site or a restaurant, and that is pretty much impossible," said Fisher. "That would be a real compliance nightmare for banks."

With regard to credit card transactions, it is already virtually impossible for Americans to use credit and debit cards to pay for online gambling services. Internet gambling presented a number of problems for American credit card companies in the 90s, including chargebacks, lawsuits from gamblers attempting to have their debts ruled unenforceable, and pressure from lawmakers seeking to ban the activity. In 2001 the major credit card companies responded by requiring all gambling-related Internet transactions to be coded in such a way that made using their cards to pay for such services impossible.

The situation created an opportunity for offshore-based alternative online payment processors like Neteller, Firepay and Citadel to fill a consumer demand that the credit card companies had ceased to service.

Today alternative payment processors are the most commonly used method of payment for American online gamblers. Neteller, the largest of the payment processors, boasts close to 3 million customers and received $119 million in revenue in the first half of this year. 86 percent of the company's active customer base resides in North America.

"The great unknown is how far into the Internet commerce stream federal regulators are willing to go," said Professor I. Nelson Rose of Whittier Law School. "The Act requires institutions like the Bank of America and Neteller to identify and block transactions to unlawful gambling sites, whatever they are. But, while the Bank of America will comply, Neteller might not, because it is not subject to U.S. regulations."

Neteller is located in the Irish Sea between the UK and Ireland.

"The courts have the power to issue temporary restraining orders, preliminary and permanent injunctions, to prevent restricted transactions," said Rose. "The only problem with this enormous power is that it is, again, practically useless against payment processors who are entirely overseas."

The Unlawful Internet Gambling Prohibition Act contains no provisions that would make it illegal for a person located in the U.S. to place a bet with an online gambling company. All provisions are directed at trying to stop the flow of money.

It is estimated that Internet gambling will generate $12 billion in revenue in 2006, with more than half of it coming from players based in the United States.

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